Massachusetts Water Resources Authority

Presentation to the

Wastewater Advisory Committee

ProposedFiscal Year 2010

Current Expense and Capital Improvement Budget

Overviews

May 15, 2009

2

Outline

AGENDA - CEB & CIP Budgets at a Glance

• Proposed FY10 Current Expense Budget

– Overview

– Expenses and Revenues

– Rates Outlook

• Proposed FY10 Capital Improvement Program

– Proposed FY10 CIP

– FY09-13 Cap Overview

– Proposed FY10 FY09-13 Spending

– FY09-13 Major Initiatives

• Capital Financing

– Accessing Capital Markets

– Debt Mix

– Ratings and Outlook

3

Budgets at a Glance

Rate Revenue Requirement: $566.8 million 4.8% increase

Direct Expenses $214.5 Rate Revenue $566.8

Indirects 41.6 Investment Income 13.3

Capital Financing (net) 347.4 Other Revenue 23.4

Total Expenses $603.5 Total Revenue $603.5

Total Budget $5.0 billion

Spending thru FY08 $2.9 billion

Remaining Balance $2.1 billion

FY09-13 Spending $1.1343 billion < $1.1438 billion 5-year Cap

FY10 Proposed CEB

FY10 Proposed CIP

4

Massachusetts Water Resources Authority

Proposed FY10

Current Expense Budget

5

Proposed FY10 CEB - Overview

On February 11th the MWRA Board of Director’s approved transmittal of theProposed FY10 CEB to the Advisory Board for its review and comment.

Rate Revenue Requirement is $566.8 million.

– $387.7 million, a 7.5% increase over FY09, will fund the sewerage system– $179.1 million, a 0.6% decrease from FY09, will fund the water system

Preliminary combined rate increase is 4.8% which assumes Debt ServiceAssistance of $7.0 million from the Governor’s Bottle Bill initiative.

6

Proposed FY10 CEB - Overview

Some of the driving forces of the Proposed FY10 CEB include:

– Revised investment assumptions to reflect current market conditions results in a$7.2 million decrease in Investment Income;

– Reduced level of Debt Service Assistance appropriation of $4.3 million. TheFY10 budget includes $7.0 million based on the Governor’s budget versus the$11.25 million included in the FY09 original budget. Debt Service Assistancewas ultimately eliminated as part of the Governor’s 9 C cuts to address theCommonwealth’s fiscal challenges; and

– Increased budgetary pressures due to pension liability, contractual salaryincreases, and ongoing contributions relating to GASB45, funding of other post-employment benefits.

The Authority plans to use the projected FY09 Surplus, an estimated $10 million, todefease debt with direct Rate Revenue relief in FY10.

7

FY10 Proposed versus FY09 Original Budget

FY09

Original

Budget

FY10

Proposed

Budget

$ Chge. % Chge.

Direct Expenses $215.9 $214.5 (1.4) -0.7%

Indirect Expenses 45.8 41.6 (4.3) -9.3%

Total Debt Service (after offsets) 317.5 347.4 29.9 9.4%

Total Expenses $579.3 $603.5 24.2 4.2%

Rate Revenue $540.8 $566.8 26.0 4.8%

Non-Rate Revenue 38.5 36.7 (1.8) -4.6%

Total Revenue $579.3 $603.5 24.2 4.2%

8

Proposed FY10 CEB – Direct Expenses

Personnel, Energy & Utilities, and Maintenance costs total $168.5 million and account for 78.6% of the$214.5 million in Direct Expense budget.

FY10

PROPOSED

% of FY10

PROPOSED

WAGES AND SALARIES $92,200,261 43.0%

OVERTIME $3,508,791 1.6%

FRINGE BENEFITS $16,072,161 7.5%

WORKER'S COMPENSATION $1,325,000 0.6%

CHEMICALS $11,304,992 5.3%

ENERGY AND UTILITIES $25,988,079 12.1%

MAINTENANCE $29,387,611 13.7%

TRAINING $173,203 0.1%

PROFESSIONAL SERVICES $6,226,213 2.9%

OTHER MATERIALS $4,138,597 1.9%

OTHER SERVICES $24,164,016 11.3%

TOTAL $214,488,924 100.0%

FY10 CEB DIRECT EXPENSES

9

FY10 Personnel Costs

Wages & Salaries $92.2M

• FY10 Proposed increases $1.5 million or 1.7% over the FY09 original budget primarily dueto contractual wage increases.

• FY10 recommends a reduction of 24 positions from the FY09 funding level of 1,246 toachieve a year end target of 1,222 positions.

• No funding for non-union manager salary increases for $227,000 in savings.

Overtime $3.5M

• FY10 reduction of $398,000 or 10.2% to recognize estimated savings due to staffing re-organization/automation initiatives primarily at the Authority’s Headworks facilities.

Fringe Benefits $16.1M

• FY10 reduction of $390,000 or 2.4% to reflect Governor’s House One recommendation tochange employer’s contribution on healthcare to an income based system.

10

FY10 Utilities

• FY10 Proposed Utilities budget decreases $3.7 million or 12.6% from the FY09 originalbudget.

• Electricity is decreasing $2.5 million or 10.8% largely due to lower projected pricing.

• Diesel Fuel is decreasing $1.3 million or 36% largely due to lower pricing and reducedrequirement. It is the Authority’s intention to top off all tanks in FY09 given the favorablepricing.

• Utility pricing always represents a risk.

• Actions taken to ameliorate risk include:

- competitively bid electricity contracts (new DITP contract opens 5/21);

- maximize self-generation;

- participate in load response programs; and

- embrace green initiatives, such as energy audits which will result in an estimated$723,000 in annual savings.

Utilities $26M

11

FY10 Maintenance

• FY10 Proposed Maintenance budget increases $1.3 million or 4.6% from the FY09 originalbudget.

• The Deer Island maintenance budget is $15.1 million, a $600,000 or a 3.8% increase ascompared with the FY09 original budget and the Field Operations budget is $8.7 million,an increase of 900,000 or 11.2%.

• Maintenance costs to preserve the Authority’s operating assets and maintain itsinfrastructure will continue to rise.

• Authority continues to employ the use of a Preventative maintenance program to minimizeasset downtime and operating risks.

Maintenance $29.4M

12

FY10 Indirect Expenses

Indirect expenses total $41.6 million, $4.3 million or 9.3% under the FY09 Original budget.

FY10

PROPOSED

% of FY10

PROPOSED

INSURANCE $2,625,000 6.3%

WATERSHED/PILOT $23,599,674 56.7%

HEEC PAYMENT $3,877,500 9.3%

MITIGATION $1,481,367 3.6%

ADDITION TO RESERVES $210,954 0.5%

RETIREMENT FUND $8,392,192 20.2%

POSTEMPLOYMENT BENEFITS $1,400,000 3.4%

TOTAL $41,586,687 100.0%

FY10 CEB INDIRECT EXPENSES

13

Expenses and Revenues - Debt Service

Debt Service

Total Debt Service (before offsets) $354.4 MillionDebt Service Assistance (7.0)Million

TOTAL $347.4 Million

• Capital Financing costs increased by $29.9 million as the $25.5 million increase ininterest expense was compounded by a $4.3 million drop in Debt Service Assistance(FY10 Proposed of $7.0 million versus FY09 original of $11.25 million).

• Debt accounts for 58.7% of total expenses, after offsets, largely to support capitalimprovements already completed.

14

Debt Service is the Largest Portion of CEB - $354.4 million

FY1990 FY2010 FY2016

42% 58%61%

39%

64%

36%

15

Debt Service Assistance is Key

Debt Service Assistance (DSA) appropriation levels are varied.History of MWRA Actual Debt Service Assistance (DSA) Receipts (FY94-10)

$20.0

$27.0

$32.0

$39.3$40.7

$44.0

$48.1 $49.4

$52.9

$4.1

$8.7 $9.6

$18.9$17.0

$7.0

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

(Mil

lion

s)

DSA appropriation

eliminated as part of

9c Reductions

16

Managing Debt Service

• MWRA is proactive about restructuring, refunding and defeasing debt in order to keep rateincreases at a reasonable and predictable level.

• Even with all of the proactive steps, FY10 debt service would have grown by 11% or $35.6million over FY09.

• In order to offset this massive increase, staff propose a targeted defeasance, using a projectedsurplus from FY09, to provide $10 million in rate relief in FY10.

Debt Service

$455.8

$441.3

$397.7$398.7

$364.4

$328.8

$300.0

$320.0

$340.0

$360.0

$380.0

$400.0

$420.0

$440.0

$460.0

$480.0

FY09 FY10 FY11 FY12 FY13 FY14

$ in

Mill

ions

Proposed $10M

Defeasance

17

Expenses and Revenues – Use of Reserves

The Authority plans to use $10.3 Million in Rate Stabilization funding in FY10.

– Rate Stabilization funds are generally used to “smooth” rate increases.

– Projected Rate Stabilization usage in FY10 is over two times the FY09 leveldue to the increasing debt service expenses for past capital spending.

– Current planning estimates assume that Rate Stabilization and BondRedemption funds will be exhausted in FY2014.

18

FY10 Budget – Major Assumptions/Risks

Assumptions:

The Proposed 4.8% rate increase assumes:

• $7.0 million in Debt Service Assistance;

• $10 million defeasance from FY09 surplus – inclusive of the $3.3 million delayed pension contribution;and

• $10.3 million in Rate Stabilization.

Risks:

• $7.0 million in Debt Service Assistance is still under debate within the Commonwealth’s budget;

• $10.0 million in projected surplus needed to defease debt in FY10;

• Utility and chemical pricing;

• Changing regulatory requirements; and

• Debt financing and investment income interest rate assumptions.

19

Massachusetts Water Resources Authority

Proposed FY10

Capital Improvement Program

20

MWRA’s Capital Improvement Program - 80% Mandated

Boston Harbor ProjectMetroWest Supply Tunnel Hultman Aqueduct Rehab

Spot Pond Supply Mains

Braintree-Weymouth Relief FacilitiesNorumbega Covered Storage

Weston Aqueduct Supply MainsCarroll Water Treatment Plant UV Treatment

Union Park

East Boston Branch SewerNorth Dorchester Bay CSO

Community Managed CSO Projects

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

$24

$44

$120

$149

$196

$305

$413

$504

$609

$580

$438

$377

$447

$499

$392

$333

$365

$297

$194

$168$152

$178

$197$205

$238 $240

$207$194 $187

$167

$139

$84 $90

$53

0

100

200

300

400

500

600

700

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions)

ProjectedActual CIP

21

Proposed FY10 CIP

ProgramTotal

Contract

Spending

thru FY08

Remaining

BalanceFY09 FY10 FY11 FY12 FY13 FY09-13

Wastewater System Improvements $2,454.1 $1,216.1 $1,238.0 $131.9 $170.3 $181.5 $125.8 $86.7 $696.1

Interception & Pumping 717.4 487.3 230.1 9.2 4.3 28.0 16.0 23.5 81.0

Treatment 510.1 51.8 458.3 18.8 59.5 66.4 61.2 35.8 241.6

Residuals 212.4 63.8 148.6 0.2 1.3 1.6 2.1 1.3 6.6

CSO 927.3 522.2 405.1 102.6 106.4 87.8 47.2 26.7 370.6

Other 86.9 91.0 -4.2 1.0 -1.1 -2.3 -0.7 -0.6 -3.6

Waterworks System Improvements 2,415.6 1,598.9 816.7 64.8 58.1 50.0 74.1 103.7 350.6

Drinking Water Quality Improvements 641.8 508.5 133.3 19.9 12.3 4.9 16.3 18.0 71.3

Transmission 994.1 672.9 321.2 12.6 18.8 21.0 29.9 31.7 113.9

Distribution And Pumping 749.0 302.0 447.0 23.0 21.1 19.7 24.4 44.6 132.8

Other 30.8 115.5 -84.7 9.3 5.9 4.4 3.5 9.4 32.6

Business & Operations Support 86.2 42.9 43.3 8.6 9.6 8.3 7.6 3.2 37.3

Total MWRA $4,955.9 $2,858.0 $2,098.0 $205.3 $238.0 $239.8 $207.5 $193.6 $1,084.1

22

Proposed FY10 CIP Spending Highlights

FY10 CIP budget of $238.0 million is dominated by large projects.

The federally mandated CSO program remains the Authority’s largest initiativein terms of spending, $106.4 million or 44.7% of FY10 spending.

The CIP is dominated by several large projects. The ten largest projects accountfor over 76% of FY10 spending:

ProjectTotal

Contract

FY10

Spending%

S.206 DI Treatment Plant Asset Protection $424.5 $56.7 23.8%

S.347 East Boston Branch Sewer Relief $86.8 $37.8 15.9%

S.339 North Dorchester Bay $238.0 $24.1 10.1%

S.359 Reserved Channel Sewer Separation $113.3 $14.3 6.0%

S.604 MetroWest Tunnel $703.4 $10.6 4.4%

S.346 Cambridge Sewer Separation $57.8 $9.7 4.1%

S.360 Brookline Sewer Separation $24.0 $9.1 3.8%

S.542 John J. Carroll Water Treatment Plant $430.2 $6.6 2.8%

S.704 Rehab of Other Pumping Stations $29.7 $6.6 2.8%

S.721 Southern Spine Distribution Mains $74.4 $5.8 2.4%

Top 10 FY10 Spending $2,182.1 $181.3 76.2%

FY10 Spending $4,955.9 $238.0 100.0%

23

FY10 CIP - Major Wastewater Project Spending FY09 - 13 Period

Top 5 Wastewater projects (FY09-13) account for 74.3% of anticipated Wastewaterspending.

Wastewater Improvement Projects

Total

Contract

Amount

FY09-13

Spending

S.206 DI Treatment Plant Asset Protection 424.5 225.0

S.339 North Dorchester Bay 238.0 98.9

S.359 Reserved Channel Sewer Separation 113.3 80.9

S.347 East Boston Branch Sewer Relief 86.8 76.0

S.346 Cambridge Sewer Separation 57.8 36.4

Top 5 Wastewater Improvement Projects $920.4 $517.2

Total Wastewater Program Spending $2,454.1 $696.1

24

FY10 CIP - Major Waterworks Project Spending FY09 - 13 Period

Waterworks Improvement Projects

Total

Contract

Amount

FY09-13

Spending

S.604 Metro West Tunnel (Hultman Aqueduct Rehabilitation) 703.4 62.7

S.542 John J. Carroll Water Treatment Plant 430.2 41.1

S.702 New Connecting Mains - Shaft 7 To WASM 3 62.3 27.2

S.721 Southern Spine Distribution Mains 74.4 25.9

S.722 NIH Redundancy & Covered Storage 89.0 23.0

Top 5 Waterworks Improvement Projects $1,359.3 $179.9

Total Waterworks Program Spending $2,415.6 $350.6

Top 5 Waterworks projects (FY09-13) account for 51.3% of anticipated Waterworksspending.

25

Fiscal Year 2009 – 2013 Base-Line Cap

FY09 Base-Line Cap Overview

• Second 5-year limit of $1.1438 billion for FY09-13 was established by the Board in FY08.

• Annual spending may vary by +/- 20%

FY09 FY10 FY11 FY12 FY13Total

FY09-13

Projected Expenditures $230.0 $251.7 $224.3 $196.7 $178.7 $1,081.4

Contingency 15.6 13.8 12.0 12.1 11.4 64.8

Inflation on Unawarded Construction 0.0 0.5 2.8 7.8 11.3 22.4

Less: Chicopee Valley Aqueduct Projects (1.2) (1.9) (9.1) (9.5) (2.9) (24.8)

Final FY09 CIP FY09-13 Spending $244.4 $264.1 $230.0 $207.0 $198.4 $1,143.8

26

FY09-13 Cap Overview• Currently projecting to spend $1.1343 billion, which is $9.5 million less

than the Base-Line FY09-13 Cap established in the FY09 Final Budget

The MWRA is complying with both the 5 year spending Cap and the AnnualCap Limitations.

Fiscal Year 2010 (FY09-13 Spending Cap)

FY09

Projection

FY10

Projection

FY11

Projection

FY12

Projection

FY13

Projection

Total

FY09-13

Expenditures $205.3 $238.0 $239.8 $207.5 $193.6 $1,084.1

Contingency 0.0 13.0 10.9 11.0 11.9 46.9

Inflation on Unawarded Construction 0.0 0.5 3.3 7.5 12.1 23.4

Less: Chicopee Valley Aqueduct Projects (1.0) (1.1) (1.3) (9.7) (7.0) (20.1)

FY09-13 Cap (Projection) $204.3 $250.4 $252.8 $216.2 $210.6 $1,134.3

Change (FY09 Base-Line to Proposed FY10)

Expenditures ($24.7) ($13.7) $15.5 $10.7 $14.8 $2.7

Contingency (15.6) (0.8) (1.1) (1.0) 0.5 (17.9)

Inflation on Unawarded Construction 0.0 0.0 0.5 (0.3) 0.8 1.0

Less: Chicopee Valley Aqueduct Projects 0.3 0.7 7.9 (0.2) (4.1) 4.7

FY09-13 CAP ($ Change) -$40.0 -$13.7 $22.8 $9.2 $12.2 -$9.5

FY09-13 CAP (% Change) -16.4% -5.2% 9.9% 4.5% 6.1% -0.8%

27

Fiscal Year 2010 (FY09-FY13 Spending Cap)

The FY10 Proposed CIP shows a decrease of $9.5M in the FY09-13 Cap ascompared with the Base-Line Cap established in the Final FY09 CIP, reflecting:

• $17.9 million in lower contingency;

• $2.7 million net increase in spending resulting from inclusion of FY10 new projects of $7.8million offset by schedule and spending shifts; and

• $4.7 million increase for Chicopee Valley Aqueduct projects mainly due to timing ofWinsor Hydroelectric initiatives.

28

FY09-13 Energy Initiatives

The Proposed FY10 CIP includes $9.1 million of capital investment for Alternative EnergyInitiatives which include the following:

• Deer Island Wind $3.6M• Nut Island Wind $3.6M• Loring Road Hydro $1.5M• Deer Island Solar $0.4M

These programs, when installed, will result in an estimated $700,000 in annual savings.

Other efficiency improvements which will result in energy savings include:

• Steam Turbine Generator upgrades• Variable Frequency Drive Replacement• Low Voltage Lighting at various facilities

2 - 600 kwwind turbines Digesters gas for

STG turbines

PhotovoltaicCells

29

Massachusetts Water Resources Authority

Proposed FY10

Capital Financing

30

Credit Strength

•Access to the capital markets is essential to the Authority’s overall mission.

•Preservation of strong credit ratings is important not only to accessing the capitalmarkets but also reducing the interest costs on borrowed funds.

•The Authority currently has strong credit ratings of AA+, AA, and Aa2, fromStandard and Poor’s, Fitch Ratings, and Moody’s Investor Service, respectively.

•One factor cited in the Authority’s January 2009 upgrade from Standard and Poor’swas its “strong management, which has generated a trend of satisfactory reserves andsolid liquidity over a multi-year period while successfully implementing numerouslarge construction projects.”

31

Expenses and Revenues – Debt Service

Nearly 80% of MWRA’s capital spending is mandated

MWRA Capital Improvement Spending

&

Debt Service

$0

$100

$200

$300

$400

$500

$600

$700

FY

86

FY

88

FY

90

FY

92

FY

94

FY

96

FY

98

FY

00

FY

02

FY

04

FY

06

FY

08

FY

10

FY

12

FY

14

FY

16

FY

18

FY

20

FY

22

FY

24

FY

26

FY

28

FY

30

FY

32

FY

34

FY

36

FY

38

FY

40

FY

42

FY

44

FY

46

FY

48

FY

50

FY

52

FY

54

$ in

Mil

lion

s

Debt Service CIP - Actual CIP - Draft Final

As of June 30th, 2009,

the total Indebtedness

is $5.9 billion

32

MWRA’s Debt Portfolio as of April 30, 2009

TypeFY09

Debt Service Budget % of Total

Principal

Outstanding

April 30, 2009 % of Total

Senior General Revenue Bonds 176,164,720$ 55.4% 3,214,710,000$ 54.8%

Subordinate General Revenue Bonds 87,515,208$ 27.5% 1,367,215,000$ 23.3%

Massachusetts Water Pollution Abatement Trust 54,177,684$ 17.0% 1,088,225,003$ 18.6%

Tax Exempt Commercial Paper(1)

-$ 0.0% 194,000,000$ 3.3%

Total 317,857,612$ 100.0% 5,864,150,003$ 100.0%

(1) The debt service on tax exempt commercial paper (TECP) is capitalized until the financed asset is put into service, at which time the TECP is permanently financed.

Principal Outstanding

Senior General

Revenue Bonds

54.8%

Tax Exempt Commercial Paper 3.3%

Massachusetts Water

Pollution Abatement Trust

18.6%

Subordinate General

Revenue Bonds

23.3%

Fiscal Year 2009 Debt Service

Subordinate General

Revenue Bonds

27.5%

Massachusetts Water

Pollution Abatement Trust

17.0%

Senior General

Revenue Bonds

55.4%